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5 Steps to Withdrawing From Your Retirement Accounts to Make Money Last

When it’s time to quit work for good, you need to know how to make your savings last

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Edmon de Haro

For roughly 40 years while in the workforce, the retirement advice most people receive is the same: Accumulate, accumulate, accumulate. Save as much as possible, particularly in tax-advantaged accounts, such as 401(k)s, IRAs and Roths, as well as taxable brokerage accounts — because when you get to the end of your primary working years, you’re going to need to live on that money for the next two to three decades to come.

When retirement comes, maybe you have a party, but likely you wonder: How exactly am I going to do that? 

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The missing piece of advice is how to design a withdrawal strategy that not only lays out how much you can comfortably spend year to year but specifically, which accounts should you withdraw from when? Is there a particular order? Is there some secret formula? 

“In general, people don’t think about this until it’s time to actually do it,” says Isabel Barrow, financial adviser with Edelman Financial Engines (EFE). Her colleague Andy Smith, an executive director with EFE (which, full disclosure, sponsors my HerMoney and Everyday Wealth podcasts), agrees. “You’re better off trying to get a few steps ahead and think about which accounts you’re going to draw from when before you get to that point.” 

I had a chance to sit down with both of them together to talk through the important steps every retiree and soon-to-be retiree should take. 

Here’s what they advise:

Step 1: Know the landscape

When it comes to taxes, there are three basic categories of accounts. Each has a distinct set of rules for putting money in and taking it out. You may already be familiar with these, but just in case:

  • Taxable accounts: These are your basic brokerage accounts (also your Treasury Direct accounts for I bonds and savings bonds). You deposit money on which you’ve already paid income taxes. It grows, and you pay taxes on any realized gains each year. In taxable accounts, you can write off losses dollar for dollar against gains as well as against up to $3,000 in ordinary income. This is called tax-loss harvesting.
  • Tax-deferred accounts: These are 401(k)s, 403(b)s, 457s, IRAs, SEP-IRAs and a few other accounts for the self-employed. You deposit pretax dollars. The money you invest grows without being taxed, and when you withdraw the money in retirement, you pay taxes at your current income tax rate. You can begin withdrawing money at age 59½ without penalty (before that, there’s typically a 10 percent penalty), and you must begin withdrawing at age 73 (currently) in the form of required minimum distributions (RMDs). The age by which you must start RMDs will climb to 75 in 2033.
  • Tax-free accounts: These are your Roth IRAs and Roth 401(k)s. You deposit money on which you’ve already paid income taxes. The money grows tax-free. You never have to pull it out. In fact, you can pass it on to future generations tax-free, making this a valuable estate planning tool.

Step 2: Think about asset ‘location’

We’re accustomed to hearing about asset allocation — an investor’s chosen mix of stocks, bonds, cash and other assets that lines up with their risk tolerance and is appropriate for their age and goals. Asset location is different. It’s selecting the accounts in which you hold your investments with an eye toward minimizing your overall tax bite.

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There are two things to think about here. First, the investments themselves. You likely want to consider holding anything that pays income in a tax-deferred account. That’s because interest is taxed at your ordinary income rate. The bigger your bond portfolio, the bigger the potential income payout. That could get pricey in a brokerage account. On the flip side, you likely want to consider holding stocks, exchange-traded funds (ETFs), real estate investment trusts (REITs), municipal bonds and other tax-efficient investments in a brokerage account. You can harvest losses in a brokerage account to help offset any gains from asset sales.

The second consideration is when you plan to take the money out. You want to have each of your assets invested for roughly the time frame you want to keep it inside the account. That’s why a Roth IRA, which doesn’t impose RMDs, tends to be the right holding place for your most aggressive assets (generally stocks) that you want to hold for the longest period of time. Starting in 2024, Roth 401(k)s won’t have RMDs either.

Step 3: Consider the tried and true path

Both Barrow and Smith were very clear that there is no one-size-fits-all as far as retirement withdrawals are concerned, in part because no one else has your particular time-based needs for your hard-earned money. That said, there is an order that experts typically — remember that word — follow to maximize tax efficiencies (i.e. pay as little to Uncle Sam as possible), and it’s this: Draw from taxable accounts first, then tax-deferred accounts, then tax-free (or Roth). Why is this the preferred order? “When you’re living in retirement, [primarily] on Social Security income, you’re in a pretty low tax bracket,” Barrow says. “You draw from the taxable bucket first because drawing from the tax-deferred bucket [means you’re increasing your taxable income] and could increase your tax bracket. More problematically, that can increase your Medicare premiums.” (More on that in a second.)

This allows for the investments in the tax-deferred bucket to continue to grow as long as possible though that’s the account you draw down next. Finally (if you have to), you draw from the tax-free bucket. 

Step 4: Beware of IRMAA (and ACA pricing)

Remember the word "typically" from Step 3? Here are the exceptions. Once your Social Security benefit starts, reduce IRA withdrawals to limit the taxability of your benefit. Research from Edelman Financial Engines shows that half or more of tax savings, from an optimal withdrawal strategy, comes from reducing the taxes on your Social Security benefits. Then we come to IRMAA, which stands for the Medicare Income-Related Monthly Adjustment Amount. 

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Essentially, if you earn more than $97,000 as an individual or $194,000 as a couple in 2023, your Medicare premiums increase significantly. The money you save on taxes — and more — could be eaten up by the increased amount you have to pay in Medicare. If you retired early and are bridging yourself to Medicare with a policy from the Affordable Care Act exchange, you may be receiving a subsidy for your coverage. Earn more than about $55,000 (again in 2023) as a single person, double that as a couple, and you are at risk of losing all or part of that benefit.  ​

Step 5: Get some help

All in all, it’s important to realize that life is changing as we speak. 

“These are not hard-and-fast rules,” Smith notes, “particularly right now.” 

Many of the provisions of the Tax Cuts And Jobs Act, which passed in 2017, are set to expire in 2025. A number of things could happen as a result. The standard deduction, for example, which in 2023 is $13,850 for single filers and $27,700 for married couples, could be cut in half. The child tax credit could be cut in half for many people. And tax brackets — for many — could grow. If you file single and earn $108,001 to $182,100, you’re in the 24 percent bracket in 2023. If the law expires, your tax bracket would climb to 28 percent. Married couples earning $274,401 to $364,200 this year are currently in the 24 percent tax bracket. But if the act expires, their tax rate would be 33 percent. All of these variables potentially change the math for retirement withdrawals. Bottom line: If you’re unsure how to proceed with the ground shifting beneath you, it’s time to talk to a financial adviser. Even an hour or two of advice can pay benefits for years to come.

Share your experience: What financial question do you have for Jean Chatzky? Share it in the comments, and she may answer it next.

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